As I read through their quarterly release, two items of significance stand out:
1. Sales increased $3 million (quarter over quarter), but their sales and marketing expenses increased $2.55 million and general and administrative increased $1.12 million at the same time! So, it took $3.67 million in direct costs to generate a $3 million increase in revenues? If they increase sales (as expected) what will change so they can do so profitably?
2. Their operating profit for the quarter was only $181,000. They earned an additional $1.0 million from interest. So of the total $1.2 million earned, it seems that only 15% of their income came from the business. Anybody can generate earnings from interest on $90 million in cash in the bank!
When you look at their forward-looking guidance of $0.31 per share (assuming they hit their high-end target) that would equate to $9.3 million in earnings. However, if you back out the interest income of approximately $4.1 million from their $90+ million cash hoard, that means they think they will only earn $5.2 million for the entire year from their business operations. Does that make this stock worth $608 million or 117x future earnings?
Plus they are execting more than $2 million in legal expenses (regarding their Olympus lawsuit) which are not included in their earnings guidance. Fair enough as these are likely one-time expenses, but nevertheless, shareholders have to pay it.
If you give their business earnings a 30x multiple ($5.2 million * 30 = $156 million) and add their cash of $95 million, you get a theoretical market value of $251 million or $8.50 per share (based on 29.8 million shares fully-diluted).
If they hit their low-end numbers (quite possible) of $0.21 per share or $6.3 million in earnings, then subtracting the interest income of $4.2 million leaves only $2.1 million in earnings from their business. Using the same methodology of above, one would get a $158 million market value or $5.30 per share.
This stock, like almost all others, trades at a price which is looking forward at its prospects. I must say the prospect for this company appear to be unusually bright. The new managers are industrious and competent and the products improving significantly, particularly as we get into 2008 and beyond. For anyone to parse quarterly sstatments and find fault is to be myopic...and stocks simply don't sell on their past or their present. The reality that most find difficulty in dealing with in the selection of equities is that they cannot differentiate clearly between today and tomorrow. If you don't have high levels of enthusiasm for GIVN's future they don't bother owning the shares. For those of us that have factual reasons to believe in this diagnostic approach increasing its relevance we will stay long and get moreso on general apprehension regarding equities and specifically GIVN. The notion that you can select or reject a stock because its present profitability is largely from interest income is only reflective of your hopelessly amateur aproach to security analysis. Find another day job, otherwise your children will remain as uneducated as you are.